Friday, November 20, 2015

A rate increase by the Fed (Who is the Fed? The US central bank that sets the pricing on all loans, effectively) in December PLUS a new war, is going to drive inflation through the roof across developing and some emerging countries. If you can't buy bread or milk to feed your family despite being employed, you are not going to have a nice time. Now imagine what the next guy's going to feel like? Expect regime changes. So why would the Fed still raise the rate? Because the rate has been near zero for quite a long time and you need a rate that's larger than inflation to stop people from being unproductive and making themselves poor. What does a near zero do? If you a buy a home in the US where inflation is 1.5%, you might pay 2.5% annual interest on your home loan; contrast that to South Africa with 5% inflation where you will maybe get 9.5% or Namibia with >6% inflation and 10.5% interest charged annually. "So why then can't the SA Reserve Bank and Bank of Namibia simply drop their rate lower?" US Money is fungible/can be changed with something called a promissory note (a promise written on paper) called a US treasury bond. Other currencies (Africa) are not; and therefore the more promissory notes that get published by the US, the more African currencies get weaker; and their economies less competitive. This causes international investment and buying to be done with more "competitive" countries (Asia and Europe). "But cheaper currencies are good for trade!": not exactly, only for commodities and that means we just compete with other commodity producers, resulting in "slave wages" - you need a competitive currency that can follow primary inuts/commodity price cycles, so that investors know when it is a good time to put their money in and when they can expect to get it out at a good return. This is the premise to not only GDP growth and wealth creation/empowerment, but development. And you cannot go from apples to apple juice, to complex food sciences without investment.

It doesn't stop with demolishing the nose of the sphinx. The US know that raising the rate will alienate and destroy Africa; but because the fake paradigm of US dollar wealth (which can only be saved at this point by an expensive war) is in danger, Yellen's announcement is going to bring Africa closer to building it's own Utopia. And it's going to be a painful path; and possibly an even worse destination. Something's got to give.